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Multistate Tax Alert: New York State Tax Reform and Fairness Commission Issues Final Report



The New York State Tax Reform and Fairness Commission (the "Commission") recently issued its final report (the "Report") to Governor Andrew Cuomo, who had tasked the Commission with undertaking a broad review of New York State’s tax code.1 The Report is "directed at reforming several parts of the State’s tax code that contribute to its complexity, its inequitable treatment of individual and business taxpayers and its negative impact on State revenues."2 In this Tax Alert we summarize the Commission’s more significant recommendations.

Corporate tax reform and phase out of 18-A surcharge

In response to concerns that the current corporate tax structure is "badly outdated, unduly complex and vulnerable to aggressive tax avoidance techniques,"3 the key Commission proposals include:

  • Merge the Banking Corporation Tax (Article 32) into the Corporate Franchise Tax (Article 9-A);
  • Adopt an apportionment formula based on a single receipts factor using customer sourcing rules;
  • Adopt full water’s-edge unitary combined filing with an ownership test of more than 50% and provide for a new combined group seven-year election for certain commonly owned groups;
  • Expand the application of economic nexus in determining whether corporations are subject to tax (currently, it is limited to testing nexus for banks that issue credit cards);
  • Eliminate the current subsidiary capital provisions;
  • Redefine what constitutes income from investment capital (i.e., essentially eliminating the current treatment of working capital as investment capital, but providing for exemptions from taxable income for dividends and gains from non-unitary corporations);
  • Use effectively connected income as the starting point in determining New York entire net income. (we understand that "effectively connected income" is to be determined under the provisions of the Internal Revenue Code ("IRC") without regard to the terms of tax treaties);
  • Require that all captive insurance companies be subject to unitary combination (in comparison to current tax law that only requires combination for "overcapitalized" insurance companies4);
  • Repeal the "tax treaty" exception to the royalty add-back provisions (under current law, royalties paid to a related party that is located in a country that has a comprehensive income tax treaty with the U.S. and imposes a certain rate of tax on the royalty income are not required to be added back to entire net income by the royalty payor5);
  • Provide for the mandatory attribution of interest expenses to tax exempt income, with expanded direct tracing of interest expense in certain situations;
  • Modify the alternative tax bases to create a credit for tax paid to other states to address possible constitutional challenges to these taxes; and
  • Reform certain business tax incentive credits such as: 1) limit the investment tax credit ("ITC") to manufacturers of goods (consistent with the original intent of that provision) and eliminate the ITC for used property (this would seem to eliminate ITC for IRC section 338(h)(10) transactions); 2) repeal the ITC for the financial services industry; 3) reform the Brownfield Credit; and 4) reduce the Empire State Film Production Tax Credit allocation by scaling back the annual allocation of $420 million by $50 million.

With respect to bringing banking corporations into the Article 9-A tax regime, such corporations would no longer be subject to an alternative tax on total assets, as is currently applied under Article 32. Instead, banking corporations would be subject to a tax on capital (net worth) in the same manner as currently applicable to nonbanking securities firms. The merger of Article 32 into Article 9-A would also provide uniformity as to how income and capital of financial services firms are sourced within and without New York State.

As part of the proposed new unitary combined reporting requirements, the Commission recommends a new election for commonly owned groups. This election would permit the non-unitary affiliates to be included in the New York unitary group if the greater than 50% ownership test is satisfied. If this election is made, the non-unitary members would be treated as unitary for all purposes. The election would be binding for seven years.

Attribution of interest expense against tax-exempt income would remain in the tax law, but the Commission's recommendation would include a more targeted direct attribution approach. Generally speaking, we believe that this proposal would involve more of an intra-corporate approach to attribution rather than a unitary group-wide approach. We believe further that it is likely that the Commission is in favor of eliminating the attribution of non-interest expenses against tax-exempt income, which is consistent with tax reform proposals put forth in recent years by the New York State Department of Taxation and Finance.

The Commission also recommends accelerating the pace of the phase-out of the 2% assessment on electric, gas, water and steam utilities (the "temporary state energy and utility service conservation assessment" under N.Y. Pub. Serv. Law § 18-a). This surcharge is currently scheduled to be phased out over a three and one-half year period beginning in 2014-15.

Sales tax reform

In response to concerns regarding the tax base and the general regressive effect of a sales tax, the Commission developed various options intended to achieve the macro goal of better aligning the sales tax base with a modern economy, while also proposing measures to provide tax relief to low-income New Yorkers. The Commission’s significant recommendations include:

  • Repeal the sales tax exemption on items of clothing and footwear costing less than $110, coupled with an enhanced household credit, earned income tax credit or stand-alone sales tax credit, and broad-based real property tax relief;
  • Expand the sales tax base to include taxation of digital products coupled with repeal of special exemptions for energy service companies, self-storage facilities and coin-operated vending machines and car washes;
  • Align the sales tax base with current consumption trends and increase uniformity between the state and local tax bases; and
  • If the sales tax base is broadened in accordance with the second and third bullets above, establish a tax reduction reserve fund to finance future real property tax and personal property tax relief.

Estate and gift tax reform

The Commission proposed the following package of estate and gift tax reforms:

  • Reform the estate tax by increasing the exemption from $1 million to $3 million;
  • Repeal the generation skipping tax;
  • Reinstate the gift tax (repealed in 2000) or require estates to add back the value of any gifts above a certain threshold in calculating the value of the estate; and
  • Close the resident trust loophole (whereby certain trusts are considered grantor trusts for federal gift tax purposes and non-grantor trusts for federal income tax purposes, so that neither the resident trust nor the New York beneficiaries of the trust pay income tax to New York).

Other matters

The Commission offered recommendations on improving the administration of the local real property tax system outside New York City. Also, with respect to various other taxes and fees, the Commission provided options to simplify tax compliance and improve the efficiency of tax administration. The Commissioner’s recommendations in this regard include the following:

  • Combining of the Metropolitan Transportation Business Tax (also known as the "MTA Surcharge") return with the main corporation franchise tax return;
  • Increasing the use of joint New York State and City franchise tax audits;
  • Adopting New York State and City compliance assurance processes that allow taxpayers to proactively discuss and resolve material issues prior to filing tax returns and being audited;
  • Establishing a 14-day threshold before a nonresident would owe New York personal income tax on income earned in New York (with some exceptions);
  • Repealing from the Personal Income Tax provisions the so called "add-on" minimum tax that applies to certain federal tax preference items;
  • Increasing the sales tax annual filing threshold;
  • Allowing self-employed individuals to pay their Metropolitan Commuter Transportation Mobility Tax (also known as the "MTA Mobility Tax") on their personal tax return;
  • Allowing individual owners of limited liability companies and partnerships to pay annual filing fees on their personal income tax return; and
  • Repealing locally administered telecommunications and utilities taxes (exclusive of those imposed by New York City) and making up for the revenue shortfalls either through increasing the state level gross receipts taxes or modernizing the locally imposed gross receipts taxes on energy.


Taxpayers may wish to consider how the Commission’s recommendations may affect their current tax structure or anticipated corporate transactions. The Commission’s recommendations may be taken into account by the Tax Relief Commission when its findings and recommendations are issued (expected by December 6, 2013) for inclusion in Governor Cuomo’s 2014 State of the State agenda.


If you have questions regarding the Report or other New York tax issues, please contact any of the following Deloitte Tax professionals.

Abe Teicher
Deloitte Tax LLP, New York
(212) 436-3370
Ken Cotty
Deloitte Tax LLP, New York
Jerry Gattegno
Deloitte Tax LLP, New York
Russell Banigan
Deloitte Tax LLP, Jericho
(516) 918-7283
Ken Jewell
Deloitte Tax LLP, Parsippany
(973) 602-4309
Theresa Hall
Deloitte Tax LLP, New York
(212) 436-3218
Mary Jo Brady
Senior Manager
Deloitte Tax LLP, Jericho
(516) 918-7087

To receive these alerts and stay connected, please sign up for our weekly newsletter State Tax Matters.

1 The Report, which was issued on November 11, 2013, is accessible at:
2 See, Report, Cover Letter to The Honorable Andrew M. Cuomo.
3 See, Report at 6.
4 N.Y. Tax Law § 211.4(a)(7).
5 N.Y. Tax Law § 208.9(o)(2)(B)(iii).

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